“so you have your franchise agreement sitting
in front of you. What’s the best way to study
it? go get a pack of coloured highlighters. Pick
four themes to review the agreement for, and
give each one a colour.”James irving | commercial and Business lawyer | irvinG lawtake it Apart
So you have your franchise agreement sitting
in front of you. What’s the best way to study
it? Go get a pack of coloured highlighters.
Pick four themes to review the agreement for,
and give each one a colour. Let’s say;
PINK is for penalties and default clauses.
Y ELLOW is for things the franchisee has to
do.
GREEN is for things the franchisor has to do.
BLUE is for things that cost the franchisee
mone y.
Next, go through the document and highlight
its parts using this colour scheme. Watch it
become less mysterious. Patterns may emerge.
Its structure will make more sense.
Then, make a list of all the clauses that
require you to do, or not do something. For
example, you have to get permission to use
the franchisor’s trademark. You aren’t allowed
to distribute marketing material without
prior franchisor approval. You must have a
minimum amount of stock on hand. You must
keep the operating manual confidential. Once
all of these things have been highlighted, you
can assemble them into a list.
The list doesn’t have to be complex. All you
need is a few words and a reference to the
relevant clause. When you need to find out
what the agreement says about the topic
in question, you can go look it up in the
agreement.Be Proactive
Having a franchise agreement highlighted
in fluoro colours and a list of the important
clauses is a good start, but not enough. To
avoid breaches, you need to be proactive.
If you have to keep the operating manual
confidential, you need to identify how to
make that happen. Maybe it will require you
to keep the manual under lock and key, limit
the number of employees who have access
to it, and make anyone who uses it check it
in and out like a library book. You should
also ask every employee to sign a written
confidentiality undertaking.
Looking at each obligation placed on the
franchisee by the franchise agreement, the
franchisee needs to identify the measures that
can be implemented to avoid breaching the
obligation, and set up a smart system to do
that.Ask Questions
Most franchisors want new franchisees to
come into their franchise system with a
correct understanding of how the franchise
business works, and are very happy to provide
information and explanations. Once you
have reviewed the franchise agreement, ask
the franchisor to explain anything you don’t
understand.The other persons you should be speaking to
are your advisers, especially your accountant
and your lawyer. Unless you have experience
reading contracts, much of the franchise
agreement’s language will be strange. How do
“indemnities” and “warranties” work? Most
franchise agreements have indemnity and
warranty clauses. What about the guarantee
clauses? Are they normal or extra harsh? If
you are the director of a company and are
becoming a franchisee, you will probably be
putting your personal assets on the line by
signing a personal guarantee as part of the
franchise agreement. How much risk are you
taking?
Business involves taking risks. But there is
a big difference between taking risks with
your eyes open and taking risks without
knowing what they are. Think of your legal
and accounting advice as an investment. Yes,
you will spend some fees at the beginning of
the franchise relationship, but if this saves you
from a serious problem in future that would
have cost you much more, then you have saved
money. Like most lawyers, I have seen awful
examples of people who have naively signed
documents without understanding them, and
who have serious problems later. In a lot of
cases, this could have been avoided if the right
advice was obtained at the beginning.Knowledge Brings confidence
A franchise agreement can be a fairly daunting
document. But if you approach it in a
systematic way, and get assistance with the
parts you don’t understand, you can become
familiar and comfortable with its contents.
Lawyers like to say that good fences make
good neighbours. Knowing what is in your
franchise agreement, and setting up a plan to
make sure you comply with it, is a great step
towards making sure you have a good and
productive relationship with your franchisor.James Irving is a commercial and business
lawyer in Perth. For more information visit
his website:
w w w.ir vinglaw.com.au
This article is not intended as legal advice for any particular person.